Binance to Provide Proof-of-Reserves Following FTX Bust – Other Exchanges to Follow Suit?

Source: Binance / Instagram

Major crypto exchange Binance will follow Gate.io 's and Kraken's example and start doing Proof-of-Reserve (PoR) audits, said CEO Changpeng Zhao. 

Zhao, known as CZ, tweeted on Tuesday evening (UTC time) that Binance would "soon" start to do proof-of-reserves, arguing that: 

"All crypto exchanges should do merkle-tree proof-of-reserves. Banks run on fractional reserves. Crypto exchanges should not."

This could be a further boost for other exchanges to follow suit. 

Kraken co-founder and former CEO Jesse Powell said that he hopes that "consumers come to demand regular Proof of Reserves audits," arguing that, while, it's not 100% foolproof,

"The more often you have to prove it, the harder it is to hide a problem."

Kraken, as announced by the company, completed its "semi-annual" PoR audits earlier this month. 

It urged users to check if their exchange(s) undergoes Proof-of-Reserves audits, saying that Kraken regularly does so in order to enable its users to verify that the balances they hold on Kraken are backed by real assets. "Don’t trust, verify your balance now," it wrote

Furthermore, in an announcement shared with Cryptonews.com, Gate.io said it would open-source its patented PoR verification method "in an effort to drive adoption of transparent operating procedures among mainstream crypto exchanges."

Gate.io said that it became the first mainstream exchange to openly submit to an independent third-party audit to showcase its Proof-of-Reserves in 2020. The audit was conducted by Armanino LLP.

Gate.io founder and CEO Lin Han said that,

"As the industry's first exchange to offer Proof-of-Reserves using Merkle Trees, Gate.io will disclose our technical solutions and open source the code used to the entire industry for free. In the process we would like to assist peers who are preparing similar verification methods of their own, sharing the knowledge we have amassed over the last two years offering Proof-of-Reserves verification."

What is Proof or Reserves (PoR)?

As Kraken explains it, PoR is an independent audit conducted by a third party meant to ensure that a custodian holds the assets it claims to be holding on behalf of its clients. 

The procedure goes like this - the auditor:

  • takes an anonymized snapshot of all balances held and aggregates them into a Merkle tree, or a data structure that contains all client balances;
  • obtains a Merkle root, which is a cryptographic fingerprint that identifies the combination of the balances;
  • collects digital signatures produced by the exchange, which prove ownership over the on-chain addresses with publicly verifiable balances;
  • compares and verifies that these balances exceed or match the client balances represented in the Merkle tree - meaning that the client assets are held on a full-reserve basis.

The exchange said that,

"Any client can independently verify that their balance was included in the Proof of Reserves audit by comparing select pieces of data with the Merkle root. Any changes made to the rest of the data, however small, will affect the root – making tampering obvious."

Legitimate concerns

The Cryptoverse is experiencing a prolonged and unprecedented turbulent period with both the markets and the companies, specifically exchanges and various protocols, taking a significant hit. The latest wave of uncertainty and, for many - surprise, came in the form of the FTX - Binance twist. 

Pascal Gauthier, CEO and Chairman at hardware wallet manufacturer Ledger, commented that,

"People have a legitimate reason to worry about the security of their digital assets if one of the world’s largest centralized exchanges ends up in financial difficulties. It’s time for an honest, industry-wide reckoning on the importance of crypto custody."

It remains to be seen if more exchanges that currently do not conduct PoR will start doing so.

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Learn more: 
- Breaking News: Crypto Prices Spike then Crash as Binance Moves to Acquire FTX
- Binance CEO Reveals Main Reason For Investing $500 Million in Elon Musk Twitter Deal

- Kraken Rejects SEC
- Jesse Powell Exits Kraken CEO Position, COO Ripley Will Take the Reins